Noel Whittaker writes exclusive weekly blog updates for the Ban Tacs Group, with IN8 Business Advisory, a member of that group. Here, he talks about the importance of superannuation, especially for retirement.
Superannuation has been in the spotlight in Parliament as the Your Future, Your Super legislation was finally passed. Predictably, much of the important stuff was lost in the theatrics that goes on in Parliament, but believe me, this is an important moment in Australia’s superannuation journey.
There are three indisputable facts about our superannuation system. First, as the Cooper enquiry pointed out a decade ago, the average Australian is “disengaged” with their super; second, superannuation will be the major resource for retirees of the future, as the system matures; and third, the amount you have when you retire will depend mainly on the rate of return your fund can achieve. A person who starts work now, at age 21 on $25,000 a year, may have $2.9 million in superannuation at 65 if their fund earns an average of 9% a year after fees and their income increases by 4% per annum. If their fund earned only 5%, their superannuation would be just $723,000. That’s a difference of over $2 million.
There are two major reforms. The first is to “staple” an employee to their existing fund until they choose to change. This means that if they change jobs, the new employer is compelled to contribute to the existing fund, unless the employee opts to move to another fund, which could be the standard fund offered by the employer, or any other fund of the employee’s choice.
Critics of the changes claim that employees will now be tied to their superannuation funds for life – that is nonsense. Given that an employee can move funds whenever they wish, it would be hoped that they would become far more engaged in their superannuation, and get enough information to make a considered decision as to whether they should stay in the existing fund or move to another fund.
But engagement goes far beyond that. The majority of workers hold insurance in their superannuation. If you move funds, the insurance does not automatically go with you – you need to make a fresh application to the fund you intend to join. Suppose you suffered a medical event, such as cancer or heart attack, while you are with your present employer, and then you wished to move to a new fund. You may well find yourself in a position where insurance in the new fund is refused, or the premiums are loaded.
An “engaged” person may well decide that the best course of action is to stay with their present fund, even if it’s performing poorly, just for the insurance. Then they may inform their new employer, via choice of fund, to pay compulsory super contributions to a different and better performing fund.
Second, there will be a mechanism where all super funds are rated, and the “bad performing” funds will be put on notice to lift their game. If their performance does not improve a notice must be sent to their members advising them that this may not be the best fund for them to be in.
While this may be fine in theory, it’s extremely difficult to achieve in practice, because you may fall into the trap of comparing apples to oranges.
There is a much better approach. Every fund should have a benchmark, which considers how much risk they are prepared to take when investing, and expected performance over time. For example, it may be “the benchmark for our balanced fund is inflation plus 4% over the cycle chosen (eg five to seven years)”. Instead of measuring numbers, the trustees of the fund should be held to account on the basis of how well they have performed in line with their benchmark.
The new legislation is a wake-up call to get engaged with your super. Disengagement could cost you hundreds of thousands of dollars in low returns over the long haul, or even the loss of valuable life insurance.
Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au
27 June 2021